TaxTMI 
TaxTMI 
2026 (9) TMI 512
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.... failed to appreciate that the assessing officer, having failed to record any dissatisfaction, with the suo-motu disallowance, had no jurisdiction to make any further disallowance under section 14A of the Act. Addition of share premium under section 56(2)(viib): Rs. 168,30,67,669.50 3. That the NFAC/CIT(A) grossly erred on facts and in law in confirming the addition of Rs. 168,30,67,669.50 made by the assessing officer under section 56(2)(viib) of the Act. 3.1 That the NFAC/CIT(A) erred on facts and in law in not appreciating that considering that the appellant had issued share warrants (and not shares) in the previous year 2016-17, the provisions of section 56(2)( viib) of the Act are, per se, not applicable. 3.2 That the NFAC/CIT(A) further erred on facts and in law in not appreciating that conversion of warrants issued in previous year 2016-17 into equity shares in previous year 2017-18 pursuant to exercise of option by subscribers was merely as per the mandated! pre-agreed terms of issuance of warrants, and therefore, the provisions of section 56(2)(viib) of the Act cannot be invoked on mere conversion. 3.3 That the order passed by t....
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....o the Assessing Officer, the correct amount of disallowance u/s 14A read with Rule 8D as further supplemented by Circular No. 5 of 2014 issued by the CBDT works out to be Rs. 56,97,807/-. The assessee in response to the show-cause notice from the Assessing Officer submitted and claimed that all the investments were old investments held by the assessee and no fresh investments have been made during the year under consideration. The assessee further explained that correct interpretation of section 14A read with Rule 8D would reveal that only such investments are required to be considered, which has yielded the exempt income during the year under consideration. However, the Assessing Officer did not accept the contentions of the assessee and made a disallowance of Rs. 56,97,807/-. 5. Aggrieved, in the appeal before the ld CIT(A), assessee reiterated its contentions along with its other contentions that the suo-motu disallowance worked out by it at Rs. 910 was only amount of disallowance which could be made as per the provisions of section 14A read with Rule 8D. The assessee further claimed before the ld CIT(A) that the Assessing Officer failed to record an appropriate satisfaction ....
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.... the assessee, it inherently conveys that Assessing Officer was not satisfied with the disallowance worked out by the assessee and there was no need to record any independent satisfaction before proceeding to work out a correct disallowance u/s 14A of the Income Tax Act. 9. Considered the rival submissions and perused the material placed on record. It is noted that the Assessing Officer in the assessment order has extensively referred to Circular No. 5 of 2014 and proceeded to work out a disallowance, which according to him should have been made by the assessee by considering all the investments which were held by the assessee as the year end. The assessment order does not record any satisfaction expressly about the suo-motu disallowance made by the assessee as to how such disallowance does not satisfy the conditions of section 14A read with Rule 8D. Hon'ble Delhi High Court in the case of PCIT vs. UK Paints India Pvt. Ltd. (Supra) has while dealing with the similar situation made the following observations: "12. It is clear from the above that neither the AO nor any of the appellate authorities - CIT(A) or ITAT - had found that the Assessee's computation of expenditure....
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....onus shifted onto the Revenue to ascertain, after examination of the accounts, as to whether or not the appellant's/assessee's claim was correct. It is only after the aforesaid exercise was conducted, could the Assessing Officer have taken recourse to the prescribed method i.e. Rule 8D of the Rules, for determining the expenditure, which, according to him, needed to be disallowed under Section 14A of the Act." 13. It is also apposite to refer to the decision of a Coordinate Bench of this Court in H.T. Media Ltd. v. Pr. CIT:2017:DHC:4694-DB, whereby this Court examined the issue and concluded as under: "35. In order to disallow this expense the AO had to first record, on examining the accounts, that he was not satisfied with the correctness of the Assessee's claim of Rs. 3 lakhs being the administrative expenses. This was mandatorily necessitated by Section 14A(2) of the Act read with Rule 8D(1)(a) of the Rules." 14. In Maxopp Investment Ltd. v. Commissioner of Income Tax, New Delhi: (2018) 402 ITR 640, the Supreme Court has held as under: "51. Having regard to the language of Section 14A(2) of the Act, read with Rule 8D of the Rules, we a....
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....ceived as the second call on allotment of the shares which happened during the year under consideration. It is further observed that all these share moneys/shares were allotted to the group concerns of the assessee. The valuation of shares had been done based on a valuer's report dated 16.08.2016 by adopting a DCF method based on the future business projections beginning from 01.04.2017 and ending on 31.03.2021. 13. The Assessing Officer challenged the methodology of valuation adopted by the assessee by comparing the projections made in the valuation report and actual figures of sales/profitability which had been earned by the assessee during the subsequent year. The Assessing Officer observed that the projections made were of self-serving nature and based on irrelevant assumptions which were tailored to justify the premium. Such projections, according to the Assessing Officer, are lacking when compared with the actual financial or the assets base of the assessee company. The Assessing Officer, therefore, proceeded to reject the DCF method and worked out a fair market value of each share at Rs. 228.41 as against Rs. 510.30 worked out by the assessee. The Assessing Officer worked....
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....tal value of asset 137330800000.00 Less: Advance tax Paid 768000000 Asset 136562800000.00 L=Total value of liability 137330800000.00 Less:Equity paid capital 948500000 Less:Reserve & surplus 22028200000 Less:Contingent liability 279000000 Liability 114075100000.00 PE=Total amount paid up equity share capital as shown on balance sheet 984500000 PV=Paid up value of equity share 10 Value per share as per above formulae 228.4174708 The real figures as per audited financial statements are not at all in tune with the projections taken for the valuation of shares and there is a huge mismatch between the fair market value of equity share as computed by the assessee and as computed by the department. Therefore, the above is just a self-serving projection and has no basis to the reality of the financials of the company. The assessee has used the DCF method just to project a valuation self-suiting for its own purpose and not on the basis of actual. The DCF figures adopted by the assessee are full of irrational assumptions j....
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....is. The merchant bankers solely relied upon an assumed without independent verification, the truthfulness accuracy and completeness of the information and the financial data provided by the company. A perusal of this long disclaimer clearly shows that the merchant banker did not do anything reflecting their expertise, except mere applying the formula to the data provided by the assessee. We, therefore, are unable to brush aside the contention of the Revenue that the possibility of tailoring the data by applying the reverse engineering to the pre-determined conclusions. 16. For all these reasons, we are of the considered opinion that there has not been any possibility of verifying the correctness or otherwise of the data supplied by the assessee to the merchant banker, in the absence of which the correctness of the result of DCF method cannot be verified. This left no option to the AO but to reject the DCF method and to go by NAV method to determine the FMV of the shares. Without such evidence, it serves no purpose even if the matter is referred to the Department's Valuation Officer. We, therefore, do not find any illegality or irregularity in the approach of conclusions ar....
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....se on the value, on the date of issue of shares, of its assets, including intangible assets being goodwill, any other know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature, whichever is higher..." Hence the difference of premium of Rs. 291.9/- (Rs.520.30/- Less Rs. 228.4/-) per share against total shares issued of 57,65,905 in no. i.e. Rs. 168,30,67,669.50/- (291.9 * 57,65,905) is proposed to add back to the total income of the assessee as per section 56(2)(viib) of the Act, during the year under consideration. I am satisfied that the assessee has under reported particular of income, penalty u/s 270A is being initiated separately." 14. Aggrieved with the above order, the assessee preferred an appeal before the ld CIT(A) and the assessee made various submissions to counter the reasoning of the Assessing Officer. However, the ld CIT(A), after noting the various facts agreed with the contentions of the Assessing Officer and held that the higher projections under the DCF method were made by the valuer at the instructions of the assessee because the valuer was to be paid his fee for preparing such report ....
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....eeds of the assessee so as to arrive at a huge chargeable premium. Whereas the NAV method is based on book results which can no way be manipulated. 6.4.2.2 As per the facts on record the first tranche of the amount of Rs. 102,60,00,127/- against the share warrants was received in September 2016 and December 2016 (i.e., FY 2016-17). Whereas the second tranche of Rs. 197,40,00,244/- against the share warrants was received in February 2018. That means by the time of paying the second tranche by the warrant subscribers (Feb 2018), the financial results for FY 2016-17 were out. These financial results clearly spell out the actual revenues in FY 2016-17 were much below the projected revenues. Such a huge gap between the expected and the actuals should be an eye opener for the warrant subscribers for not converting the warrants into equity shares. On the contrary the warrant subscribers went ahead and converted the warrants into equity shares because the warrant subscribers have the right and option to exit by not converting the warrants into equity shares. Moreover, the warrant subscribers were the related parties of the appellant-assessee. All this suggests that it is a design ....
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.... 2012-13 Rs. 312 Crores in Assessment Year 2014-15 and Rs. 407 Crores in Financial Year 2015-16. It has been submitted that no businessman would infuse such huge capital unless it has substantial growth plans. It has been submitted that assessee had also launched its first marketing campaign in Financial Year 2015-16 through the TV, Radio and other digital platforms. The assessee has submitted that the Ld Assessing Officer and CIT(A) while comparing the projections with the actuals restricted the comparison to the financial results of Financial Year 2017-18 only. It has been submitted that going forward the actual performance for Assessment Year 2019-20 and 2020-21 were much higher than the projections made for those years under the DCF method. It has been submitted that actual year on year (YOY) growth in profit before tax in Assessment Year 2019-20 was 67% whereas the projected YOY growth for the said Assessment Year was only 39%. Similarly actual year on year growth in revenue in Assessment Year 2020-21 was reported at 47% as against the projected year on year growth of 33% under the DCF method. It has been submitted that the actuals for the Financial Year 2017-18 were also larg....
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....(AIR 2007 SC 2172 - CIT v. Bharti Cellular Ltd.:330 ITR 239 (SC) - Hindustan Lever Employees' Union v. Hindustan Lever Ltd.:1995 AIR (SC) 470 - Shreyans Industries Ltd. v. JCIT:277 ITR 443 (P&H) - Akash Ceremics (P.) Ltd. vs. ITO:[2024] 168 taxmann.com 407 (Guj.) - PCIT v. Cinestaan Entertainment Pvt. Ltd. : ITA No. 1007/2019 (Del.) - DCIT vs. Weldon Polymers (P.) Ltd.:[2024] 207 ITD 517 (Delhi- Trib.) 19. It was submitted that the Hon'ble Delhi High Court in the case of PCIT vs. A.H. Multisoft (P.) Ltd.: [2025] 305 Taxman 347 (Del.) held that the report of an expert could not be rejected on ground of general disclaimers, without AO pointing out any material error in data as used by expert. The DCF method is a recognized method but it is not an exact science and can never be done with arithmetic precision and, therefore, the valuation by a valuer has to be accepted unless, specific discrepancy in the figures and factors taken are found. 20. It is further submitted that future events are beyond the control of any person, much less the assessee, and therefore, comparison, simplicitor, between projected and actual numbers can....
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....rthermore, as noted in the impugned order and as also pointed out by Mr. Vohra, the shares in the present scenario have not been subscribed to by any sister concern or closely related person, but by outside investors. Indeed, if they have seen certain potential and accepted this valuation, then Appellant-Revenue cannot question their wisdom. The valuation is a question of fact which would depend upon appreciation of material or evidence. The methodology adopted by the Respondent- Assessee, accepted by the learned ITAT, is a conclusion of fact drawn on the basis of material and facts available. The test laid down by the Courts for interfering with the findings of a valuer is not satisfied in the present case, as the Respondent-Assessee adopted a recognized method of valuation and Appellant-Revenue is unable to show that the assessee adopted a demonstrably wrong approach, or that the method of valuation was made on a wholly erroneous basis, or that it committed a mistake which goes to the root of the valuation process." (emphasis supplied) 21. In this regard, reliance is further placed on the following decisions wherein it was held that FMV of a share determined as per DCF method ....
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....as supplied by the assessee, iii) that the Assessing Officer and the learned CIT(A) in that case found the discrepancy in data as was projected with the actual results which were declared by the assessee iv) that the addition was made by rejecting the data on the ground that aggressive profits were projected as compared to the actual declared by the assessee and according to the AO/CIT(A) the actual growth was not commensurate with the growth projected by the assessee. All such findings have been recorded by the learned ITAT in the said judgement of OYO Hotels and Homes Private Limited in Para 12, Page-31 to 32 of its order, a copy of which has been placed on record by the learned AR as under: 12. Considered the rival submissions and material placed on record. From the above facts on record, we observe that the assessee had issued CCPS after the reorganization of the company and in order to issue the above CCPS, the assessee had obtained the valuation certificates from the two valuers, which justified the issue of shares at a premium. The contention of the revenue is that the assessee had obtained the share valuation on the basis of aggressive projections....
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...., Shri Vikram Singh Sharma has heavily relied upon and supported the orders of the Assessing Officer/CIT(A). It has been submitted that the Assessing Officer was fully justified in making the addition in accordance with the provisions of section 56(2)(viib) of the Act. He has submitted that the facts and figures given in the chart were supplied by the assessee and the valuer simply did an arithmetic exercise to certify these figures without carrying out any independent study pertaining to the market in which the assessee operates. He has submitted that the Ld CIT(A) has correctly observed that since the valuer was to be paid by the assessee to prepare the reports, which suits the interest of the assessee. He has submitted that the Assessing Officer is fully justified in ignoring such DCF valuation and making a valuation based on NAV which are supported by the audited financials of the assessee. 26. Further Ld CIT-DR argued that when there was a difference in the projected figures as per DCF method and amounts actually realized in the subsequent year, the Assessing Officer had no option but to reject such projections and proceed to determine the FMV of the share through the NAV b....
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.... basis. This action of the Assessing Officer resulted in addition of Rs. 168.31 crores, which is under challenge before us. 29. We noticed that Ld CIT(A) fully agreed with the approach of the Assessing Officer and further held that the projections made in the valuation report were also not justified based on the past growth history of the assessee's business. Ld CIT(A) thus upheld the action of the learned Assessing Officer. 30. We notice that various courts have time and again held and reiterated the legal proposition that report issued by the technical expert is binding on the Assessing Officer and the fair market value carried out in the report of expert cannot be disturbed by the Assessing Officer. The Hon'ble Delhi High Court in the case of PCIT vs. A.H. Multisoft (P.) Ltd.: [2025] 305 Taxman 347 (Del.) has held that the report of an expert cannot be rejected on the basis of general disclaimers without pointing out any material error in data as used by experts. It has further been held that DCF method of determining valuation of share is not an exact science and can never be done with arithmetic precision and therefore the valuation by the valuer has to be accepted unles....